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Resurrecting Health Care Rate Regulation Erin C Georgia State University College of Law Reading Room Faculty Publications By Year Faculty Publications 12-2015 Resurrecting Health Care Rate Regulation Erin C. Fuse Brown Georgia State University College of Law, [email protected] Follow this and additional works at: https://readingroom.law.gsu.edu/faculty_pub Part of the Administrative Law Commons, Health Law and Policy Commons, and the Medicine and Health Sciences Commons Recommended Citation Erin C. Fuse Brown, Resurrecting Health Care Rate Regulation, 67 Hastings L.J. 85 (2015). This Article is brought to you for free and open access by the Faculty Publications at Reading Room. It has been accepted for inclusion in Faculty Publications By Year by an authorized administrator of Reading Room. For more information, please contact [email protected]. H - Fuse Brown_26 (Hamilton12.7) (Do Not Delete) 12/15/2015 6:00 PM Resurrecting Health Care Rate Regulation Erin C. Fuse Brown* Our excess health care spending in the United States is driven largely by our high health care prices. Our prices are so high because they are undisciplined by market forces, in a health care system rife with market failures, which include information asymmetries, noncompetitive levels of provider market concentration, moral hazard created by health insurance, multiple principal-agent relationships with misaligned incentives, and externalities from unwarranted price variation and discrimination. These health care market failures invite a regulatory solution. An array of legal and policy solutions are typically advanced to control our health care prices and spending, including: (1) market solutions that focus on transparency and consumerism to discipline health care prices; (2) antitrust enforcement to promote competition in the provider market; (3) consumer protections that protect individual uninsured or underinsured patients from unfair prices; (4) health care payment and delivery reforms that alter financial incentives of health care providers to reduce overutilization and improve efficiency; and (5) regulation of provider payment rates. The literature on these health care policy approaches reflects the fragmentation of the U.S. health care system, typically considering each approach in isolation, and it is difficult to make sense of an a la carte menu of approaches. This Article sets forth an analytic framework to simultaneously and comprehensively evaluate all the policy solutions to discipline health care prices by measuring each solution for its ability to address the health care market failures. Applying this policy-against-market- failure analysis leads to the following conclusion: only one solution—rate regulation—is capable of addressing the widespread and growing provider monopoly problem. More politically popular market approaches such as price transparency and payment and delivery reforms can correct the market failures from information asymmetries and principal-agent problems, but because they do not address the market power of providers, they will be ineffective to control health care prices and spending without accompanying rate regulation. It is time to resurrect rate regulation and place it squarely in the center of any policy strategy to control health care prices and spending. * Assistant Professor of Law, Georgia State University College of Law. My deepest appreciation to the Saint Louis University Center for Health Law Studies, and the American Society for Law, Medicine & Ethics for the opportunity to present an earlier version of this Article at the 2014 Health Law Scholars Workshop. I would like to thank Charlotte Alexander, Heather Bednarek, John Cogan, John Jacobi, Kelly Dineen, Rob Gatter, Jesse Goldner, Tim Greaney, Mark Hall, Nicole Huberfeld, Lisa Ikemoto, Peter Jacobson, Sandra Johnson, Steve Kaminshine, Lauren Sudeall Lucas, Jessica Mantel, David Orentlicher, Nirej Sekhon, Elizabeth Sepper, Anne Tucker, Jason Turner, Deepa Varadarajan, Sidney Watson, and Ramsi Woodcock for their helpful comments and feedback. Many thanks to Genevieve Razick for her research assistance. All errors are my own. [85] H - Fuse Brown_26 (Hamilton12.7) (Do Not Delete) 12/15/2015 6:00 PM 86 HASTINGS LAW JOURNAL [Vol. 67:85 Table of Contents Introduction .................................................................................................. 87 I. Health Care Prices and Market Failure ........................................... 92 A. Information Asymmetry ........................................................... 93 B. Noncompetitive Provider Markets ......................................... 94 C. Moral Hazard and Third Party Payment ............................ 96 D. Principal-Agent Problems ....................................................... 98 E. Externalities of Irrational Hospital Prices ..................... 102 II. Policy Solutions Evaluated Against Market Failures .............. 103 A. Market Solutions .................................................................... 103 1. Price Transparency .............................................................. 104 2. Consumer-Directed Health Care ........................................ 107 3. Reference Pricing ................................................................. 109 4. Tiering and Narrow Networks ........................................... 111 5. Market Approaches Measured Against Health Care Market Failures .................................................................... 112 B. Antitrust Enforcement.......................................................... 114 1. Antitrust Strategies to Address Hospital Market Power .. 114 2. Antitrust Strategies Measured Against Health Care Market Failures .................................................................... 115 C. Payment and Delivery Reforms ............................................ 118 1. ACOs and Bundled Payments ........................................... 118 2. Payment and Delivery Reforms Measured Against Health Care Market Failures .............................................. 120 D. Consumer Protections ............................................................ 121 1. Contract Law and Muscular Supervisory Doctrines ........ 122 2. Hospital Fair Pricing and Balance Billing Laws .............. 125 3. Consumer Protections Measured Against Health Care Market Failures .................................................................... 128 E. Rate Regulation ..................................................................... 128 1. All Payer Rate Setting ......................................................... 129 2. Caps on Negotiated Prices for Private Health Plans ........ 133 3. Global Budgets .................................................................... 133 4. Rate Regulation Measured Against Health Care Market Failures .................................................................... 135 III. Resurrecting Health Care Rate Regulation .............................. 137 A. Conclusions for Noncompetitive Provider Markets ........ 137 B. What to Do with Competitive Health Care Markets ...... 140 Conclusion .................................................................................................. 141 H - Fuse Brown_26 (Hamilton12.7) (Do Not Delete) 12/15/2015 6:00 PM December 2015] RESURRECTING HEALTH CARE RATE REGULATION 87 Introduction In the United States we spend considerably more on health care than any other wealthy, developed country whether measured as a percentage of GDP or on a per capita basis.1 According to health economists, the explanation of our excess health care spending is: “It’s the prices, stupid.”2 We spend more in the United States on health care because our health care prices are high. That may sound like a tautology, but it is not.3 Higher health care expenditures in the United States might alternatively be explained by higher consumption, that we are sicker or fatter than our counterparts in Europe or Asia, that we have more defensive medicine as a result of our malpractice system, or that we have higher administrative costs from our fragmented and complicated system of providers and payers.4 However, none of these factors sufficiently explain our excess health care spending.5 The story of our unchecked health care spending in the United States is a story about high and undisciplined prices.6 The price dynamics of our health care system are epitomized by the chaotic and complex pricing system for hospital services, which are an outsized exemplar of the larger pricing problem in U.S. health care. The nonsystem for hospital pricing is particularly bewildering when observed on the level of the individual patient. Hospital services are among the most expensive things we will buy in our lifetime, but we do not shop for hospital care like any other similarly large purchase, such as 1. Luca Lorenzoni et al., Health-Care Expenditure and Health Policy in the USA Versus Other High-Spending OECD Countries, 384 Lancet 83, 83 (2014). 2. Gerard F. Anderson et al., It’s The Prices, Stupid: Why The United States Is so Different From Other Countries, 22 Health Aff. 89, 103 (2003). 3. In the health care context, the terms “price,” “spending,” “cost,” and “charge” have different and often confused meanings. In this Article, health care prices are the amounts a provider expects to be paid by payers and patients for the items and services rendered; health care spending is the amount of expenditures by public (government) and/or private households or institutions on health care goods and services; health care costs are
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